Issues with the Smith–Wilson method
2016 (English)In: Insurance, Mathematics & Economics, ISSN 0167-6687, E-ISSN 1873-5959, Vol. 71, 93-102 p.Article in journal (Refereed) Published
We analyse various features of the Smith–Wilson method used for discounting under the EU regulation Solvency II, with special attention to hedging. In particular, we show that all key rate duration hedges of liabilities beyond the Last Liquid Point will be peculiar. Moreover, we show that there is a connection between the occurrence of negative discount factors and singularities in the convergence criterion used to calibrate the model. The main tool used for analysing hedges is a novel stochastic representation of the Smith–Wilson method.
Place, publisher, year, edition, pages
2016. Vol. 71, 93-102 p.
Smith–Wilson, Discount curve, Yield curve, Interpolation, Extrapolation, Hedging, Totally positive matrix, Solvency II
Probability Theory and Statistics
Research subject Mathematical Statistics
IdentifiersURN: urn:nbn:se:su:diva-139986DOI: 10.1016/j.insmatheco.2016.08.009OAI: oai:DiVA.org:su-139986DiVA: diva2:1076569